Stock market apps make beginner investing easy, but tread lightly

Published: Apr. 16, 2019 at 2:04 PM EDT
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Pop culture and movies have long made the idea of betting on the stock market and striking it big an enticing one.

The age of the cell phone and tablet app have made buying stocks easier than ever.

If you've considered it, let's start with the basics: What is the stock market?

"It's a place where companies can raise money to expand their businesses, build more factories," says Scott Below, ECU Associate Proffessor of Finance, "A strong stock market is necessary for a strong economy. If you're going to have an economy that can build companies and grow the GDP and create jobs, you need companies to have easy access to capital."

Next comes the app platform to invest with. Apps like Robinhood have billed themselves as stock market trading for the every day person and easily let you link a bank account, but Below says you should know how apps like it make their green.

"The companies, the brokerage firms that produce these apps, they make money based on you trading and so they are trying to encourage you to trade."

And then there's the market bid & ask spread that can chip away at the returns of active traders, especially if the stock you paid for drops in value.

"There's going to be a bid price which might be $20 and an ask price $20.25. So, if you simultaneously bought and sold the same shares of stock you'd lose 25 cents in that bid ask spread, and that spread goes to the market makers, the people who provide liquidity to the market.

Stock trading is not for the feint of heart. In fact, Below says that over the last 30 years the average individual investor buying stock in the S&P 500 has made just over 3.79% per year.

"The other thing that's concerning about the apps is, stock trading, options trading, futures trading, all those types of things, are very much like gambling. It's a speculative activity. And so if you have an addictive personality it can get you into a lot of trouble financially. And you can turn a retirement nest egg into essentially nothing in a relatively short period of time if you're not careful and don't know what you're doing," Below says.

Below recommends finding a quality stock by doing your research, invest in it, and let it grow, instead of jumping around trying to catch the next rocket stock.

"Nobody can predict what the stock market's going to do day to day or moment to moment, and if you're trading that's really what you're trying to do and you're really setting yourself up to fail," says Below.

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